The Art Market Monitor sat down with Ian Peck of the Art Capital Group a few weeks ago–just after the Old Master sales and just before the London sales–to discuss Art Capital Group’s view of the market from their unique position providing financing to dealers and collectors.
AMM: You saw the Old Master sales, what did you think?
Ian Peck: I thought it was another example of the weakness in the market. The transaction volume has dropped precipitously. So it is less about value; it’s more about actually finding a buyer to transact with. It’s stagnation, in a way. Things have ground to a halt. People are just sitting on the sidelines rather than making acquisitions and sellers are faced with a choice: try and sell but with the prospect of finding a buyer being relatively slim. Or not to sell and hold on.
AMM: And wait to see what the prices might be later, especially if we do have a deflationary environment. I was listening to a dealer at the Sotheby’s Old Master sale saying he wasn’t worried about now, even the prices now, he’s worried about six months from now. You get the sense the dealers are holding back.
Ian Peck: You have dealers who naturally have to be forward looking in their buying. I think they’re looking downstream. Some of the dealers went through the last downturn in 1990. That was less broad-based than this one–at least that’s the consensus–and that lasted a couple of years. So this could be three to five years of malaise. Dealers are going to be cautious about committing their capital at this point. I think the next year–certainly the next six months, twelve months, eighteen months–dealers are very cautious.
(More of the interview after the jump.)
AMM: Less broad-based because in the early 1990s the Japanese stopped buying Impressionist work?
Ian Peck: Just from an economic stand point you had the Japanese speculation which was driving the market in the 80s. That came to an end in the 1990s when the Japanese economy blew up. Now, you have the world economy blown up. Where the Japanese fell off, there were others who stepped in–eventually–to pull it back up. Now, you have a wasteland. Everyone’s economy is down. So I would say what’s happened now versus then is a thousand times worse.
AMM: So we’ve yet to see it work it’s way into the art market.
Ian Peck: The art market is a trailing indicator. Real estate is trailing indicator; the art market is six months behind real estate. We’re on the down cycle now and I don’t think the bottom is in sight for a while. I think a year from now we might be sitting here and asking have we bottomed?
AMM: You lend against this down cycle. Is there a narrower range of works that you’re willing to lend against?
Ian Peck: Yes. We’re less flexible on our credit standards. We’re less flexible on what kind of assets we’ll lend on. For example: a year or two ago, we might have been more aggressive about lending into the Contemporary art. Where now, we’re not. There’s a flight to quality. In our case, a flight to quality means blue chip names, widely held things: Impressionist, Modern and Old Masters. And other categories that we think will hold up well in a down market.
AMM: Not Warhol? He’s widely held but we’ve seen recent numbers from Artnet suggesting that his market has slowed.
Ian Peck: Well, we would. But the discount we would apply to a Warhol would be pretty heavy. We’re still aggressively lending. But our risk levels have gone up; so our rates have gone up. Our loan-to-value ratio–the amount we’re willing to advance against the collateral–has gone down. So we’re still active. But just as in the real estate market you have, well, in the New York real estate market you still have sellers clinging to values of six months ago or a year ago. You have buyers who are 2,000 feet below them; there is this Mexican standoff going on. The buyers are going to win, ultimately.
AMM: Is that a problem for you?
Ian Peck: Fortunately for us, about a year ago we felt the tremors of what was coming. And divested a lot of our loans at that time. We wouldn’t renew loans and we let our loan portfolio contract. So we don’t have a lot of exposure right now. We’re in the enviable position of being able to go out and buy other people’s loans that have blown up where they are underwater on the values that they’ve lent on. We’ve re-priced them.
AMM: Has the composition of your loans changed?
Ian Peck: Just as in 1990, when an enormous amount of Contemporary dealers went out of business. The same will be true here. Dealers are trying to conserve as much liquidity as possible. And they no longer have their main avenue to cash, which is to sell. So there are many people who want to create liquidity without having to sell.
AMM: I assume a lot of your loans are fairly short term.
Ian Peck: They are. Our average tern is about 18 months.
AMM: It really is allowing people to move in and out of liquidity. What’s the general breakdown of dealers versus private collectors?
Ian Peck: It’s about half and half. We have the dealers that we work with are international but they’re about 50/50 European and US-based. And the collectors that we deal with are about half-and-half Europe/US and a little bit of Asia.
AMM: Generally what are your collectors looking to use the money for. What are they doing with the loans?
Ian Peck: I think they are creating cash just to hold it so they can feel safe and sleep at night. These days people like to hold cash more than anything else. There are some people who find some remarkable values in the market that they want to move on. So occasionally there is an acquisition but it these are all distressed situations. Nothing is without some kind of trauma to it.
AMM: I assume this is a shift. Were you dealing with distressed situations 18 months ago?
Ian Peck: Clearly not. The business right now is about buying distressed debt, repackaging it and making it work. People have other fires to put out. In some cases, they’ve looked at the real estate. They can’t get any leverage there. They’ve looked at their stock portfolios: that’s a disaster. Finally, they look at the wall and see grandma’s Picasso. We could get some liquidity there. And they do that.
AMM: Would you do something like that with the people at Brandeis?
Ian Peck: Actually, that would be a good fit. I’m sure it’s heartbreaking to see a collection like that to be sold. And the haircut that they’re going to take in terms of selling right now is going to be enormous. There’s a compelling argument to be made that if they could get the liquidity they need to stay afloat, in the next five years or ten years the art market will adjust and come back. They can preserve it. The only way to do that is with some type of financing.
AMM: What happens with these distressed clients in two years if things don’t improve and you have to take some of this art?
Ian Peck: We would then become a large holder of art. Our view is that as long as we’re in at the right level we can hold for a long time. You can look at the last 20 years and people made absolute fortunes in down cycles by buying real estate, distressed whatever it is. Two years ago distressed debt wasn’t our business. But its a necessary evil at this point. If you’re going to do it you want to be prudent about it. With the faith that the market eventually will come back. That people will one day pay top dollar for Picasso, Warhol, Rothko, Rembrandt, whatever it is.
AMM: Well, what do you think it will be?
Ian Peck: Historically, important artists are important artists over a twenty-year cycle. I would expect to see that Modern masters are still Modern masters twenty years from now.
AMM: So you’re not worried about the shift.
Ian Peck: One of the things we spend a lot of time and energy at is managing our portfolio. We look at it from a bird’s eye view and say how much do we have of that and how much do we have of this. We’re always sensitive to even the smallest gyrations in the market in terms of value and in terms of taste.
AMM: I’m assuming in this market state you’re not making very many loans in advance of an expectation of a rise in market value.
Ian Peck: That’s right.
AMM: Did you used to do that?
Ian Peck: No. There was a lot of pressure on us to do that. Borrowers typically want to adjust your values as the market goes up. We pushed back. We probably lost a few clients that way. But we felt, you have to be disciplined.
AMM: Art is one of the few places where there wasn’t much leverage available. Do you think that had an effect on this market?
Ian Peck: I think so. Where the easy credit was available–not from a firm like us but from a broader sense that hedge funds were borrowing so much money. And now you’re seeing them implode by the hundreds. Leverage is great going up; it’s horrible going down. And we’re seeing that now.
AMM: One view of the art market is that there is plenty of money around to buy art. The problem is finding the supply of good work to sell.
Ian Peck: I think that’s a weak argument. That’s a seller’s argument. I don’t think there’s a lot of cash around. People are using their cash for essential things like paying the mortgage or preserving certain assets that they have to protect. I think it is a real cash crisis. I think the art market or the auction business, for example, will be lucky to survive. I think it’s going to get a lot worse and going to last a lot longer than people think.
AMM: Play the scenario out for me, a replay of the 1990s drought. Do you get more involved or less involved in helping people raise money off their art?
Ian Peck: I think we’re going to get more involved and more creative about how we do it. A lot of what we’re doing is buying other people’s loans that need to be re-worked, repackaged and worked out. Going forward we’re going to be a force of stability in keeping what transactions are happening alive and creating a floor for values, which is really what the market needs to see. Everyone needs to say, Okay, it’s horrible but we’ve arrived at the bottom and the prices are now you can see that there’s a stabilization. That’s the next big thing that we’re going to be looking for: the leveling off of the plane–hopefully a few feet off the ground–and we’ll be looking to move up from there.
In people terms the concern is that you have a market that let’s say over the last three four years has averaged $30-40 billion in transactions both public and private. Let’s say $50 billion. That number in ‘09 is going to be under $10 billion. That means you have 70-80% less volume. There 70-80% of the staff of these operations has to go down. That’s a lot of people.
AMM: Do you think its a matter of getting through 2009?
Ian Peck: I think that art and the art market in general is largely driven by psychology. It’s supply and demand economics but what makes people spend, the impetus to acquire, is something which comes from a sense of well being. If you don’t feel secure financially, the last thing you think about is buying art.
Until people come back and say the dollar is stabilized, inflation is under control, the banks that are left aren’t going to go out of business, the market is stabilizing. That will trickle through again to people feeling like they can spend again.
AMM: You mentioned inflation. One of the assumptions is that there is going to have to be inflation to deal with these debts. Does inflation help the art market?
Ian Peck: No. Because there will be fewer dollars to acquire. Again, it’s about real transactions closing. In the art market, if someone has fewer dollars to spend but the price is higher you’re farther away from getting a transaction done. So, inflation is very damaging across the board. Unfortunately, it’s pretty certain that we’re going to have increasing inflation over the next couple of years.
Again, it’s about arm’s length transactions happening with a willing seller and a willing buyer. Those are the kinds of transactions that you’re going to want to see occurring. And if enough of them occur someone is going to say there’s a trend here, there’s a market. Right now I think it’s hard to argue that there is a market. There’s no activity.
Having said all that, the shrewdest collectors historically are the ones who enjoy this environment. They find great works. They find distressed situations where someone has to sell and they make phenomenal purchases. For the lucky few who have the liquidity–and are shrewd–I think there are going to be great opportunities.